Russell 2000 stocks often fly under the radar, overshadowed by their larger counterparts in the S&P 500. However, for discerning investors, this index presents many growth opportunities. It has some of the most innovative companies poised to disrupt their respective industries.
Besides the lower portfolio allocations, small caps are trading at the largest valuation discount to larger peers. Yet, despite the discount, investors should be very selective. According to JPMorgan (NYSE:JPM) analysts, over 40% of Russell 2000 stocks are unprofitable. Therefore, instead of buying the index or a corresponding ETF, it pays to be more selective.
This article spotlights three Russell 2000 stocks with considerable potential. Each has carved a niche in its domain and has a clear trajectory towards explosive growth. Moreover, these companies have healthy profitability and robust balance sheets to weather higher rates. Dive in to discover why these Russell 2000 stocks deserve a closer look.
Tenable Holdings (TENB)
The critical need for robust cybersecurity measures becomes increasingly evident as the digital landscape expands. Tenable’s (NASDAQ:TENB) leadership in vulnerability management and its extensive product portfolio positions it to benefit from preventative security measures. Nessus, its flagship product, is widely recognized for its effectiveness in vulnerability management.
The company’s consistent revenue growth makes it one of the best Russell 2000 stocks to buy. Notably, over the past five years, it has compounded revenues at a 22% annual rate. The company delivered another impressive quarter in the second quarter of fiscal year 2023. Revenue grew 19% year-over-year to $195.0 million. Impressively, management also raised third-quarter sales guidance to between $197 and $199 million, above the consensus of $194.47 million.
Due to its leadership in vulnerability management, Tenable has been attracting new customers. It is seeing accelerating momentum across its product portfolio. Tenable One is driving high-volume deals as customers consolidate security tools and vendors. As a result, the company has been adding customers at a fast clip. In the second quarter, it added 426 new enterprise customers.
Stringent data protection and compliance requirements worldwide are driving organizations to invest in cybersecurity solutions. Tenable is well-positioned to assist clients in meeting these regulatory demands.
Axcelis Technologies (ACLS)
Axcelis Technologies (NASDAQ:ACLS) specializes in equipment and services critical to semiconductor manufacturing, particularly ion implantation solutions. As semiconductor demand surges due to applications in 5G, artificial intelligence and electric vehicles, Axcelis is poised to capitalize on this industry tailwind.
Its portfolio of cutting-edge products addresses the evolving needs of semiconductor manufacturers. Its ion implanters are critical for fab process optimization. Indeed, due to the essential nature of its products, revenues have grown impressively. Revenues have tripled from $301.5 million in fiscal year 2015 to $920 million in the last fiscal year.
And while most Russell 2000 stocks are unprofitable, Axcelis has been a profit machine. Since 2015, the company has generated a net profit. Notably, profitability has accelerated recently, with EBITDA growing at a 62% CAGR over the last three years. In terms of free cash flow (FCF), the company earned an impressive $6.24 FCF per share in 2022.
While cyclical factors may impact the semiconductor industry from time to time, the long-term outlook remains positive. Axcelis is the implant leader and the only provider with a full family of implant products. Besides, its established customer relationships and technological expertise allow it to maintain a strong market position.
Remitly Global (RELY)
Remitly Global (NASDAQ:RELY) is one of the fastest-growing Russell 2000 stocks in the digital remittance and cross-border payments industry. It is well-positioned to capitalize on the increasing demand for efficient, secure and cost-effective international money transfers.
The Seattle-based fintech provides a user-friendly platform for sending money across borders. Particularly, it caters to the needs of immigrant communities and underserved populations in over 170 countries. Usage on its platform is surging as the company added 1.4 million active customers, 48% year-over-year growth.
One of Remitly’s key strengths is its emphasis on user experience. The company is leveraging its global scale to offer customers competitive exchange rates and low fees. Transaction speed is another differentiator driving more users to its digital services. Over 92% of transactions are disbursed in under an hour.
Due to its expanding network of countries and corridors, growth has been impressive. Revenues grew 43% in FY2022 and 41% in the latest quarter. Furthermore, the company’s strategic partnerships with various financial institutions will drive more growth. For instance, the recent integration with Mastercard (NYSE:MA) will provide its customers with more options.
Remitly offers an opportunity to participate in digital remittances and cross-border payments. More partnerships and increasing integrations with instant payment networks will deliver strong revenue growth.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
